Types Of Bonds

What is a "long bond" versus a "short bond"?

We're talking about long bonds versus short bonds. What we're really talking about is the maturity, how long until the company or the government has to pay back the value of that bond. A long bond can be one, two or three years out until you'll actually receive your principle back with a bond. A short bond is going to be a shorter period of time. The reason that's important is there's this common saying out there that, "With bonds you're always going to get your money back" - assuming that the company doesn't default. That's true, but that's only true if you hold your bond to maturity. You have to remember that with a long bond, you might have to hold that bond for 2 years to get your principle back.

What is a "government bond"?

A government bond is a bond that is issued by a government to raise money for its current expenditures. Traditionally, especially in the United States, US government bonds are considered one of the safest investments worldwide. A bond could be issued by other governments, or other states or cities. Cities will issue a municipal bond. There can be other government-type entities that are issuing bonds that might not have the credit-quality you would think of when you look at a US government bond.

What is a "junk" or "high yield" bond?

A "junk" bond or a "high yield" bond - and we can usually use those words interchangeably - really refers to the credit quality of the issuer of that bond. With a junk or high yield bond, we are dealing with people, firms or countries that have a high likelihood that they are going to default on their bond. Because of that high likelihood of default, they are going to be charged a higher rate of interest, a higher yield, on that bond, because of their poor credit quality.

What is a "municipal bond"?

Municipal bonds are bonds that are issued by municipalities, be that a city or a county. They are issuing these bonds to raise money to do something for that municipality. Traditionally, most municipal bonds are going to be federally tax free and state tax free, as long as you're buying municipal bonds in the same state where you are a tax payer.

What is a "utility bond"?

Utility bonds are bonds that are issued by utilities, whether that be water or power, etc. We don't really think about classified bonds as utility bonds much anymore. It was probably an easy way to say: here is a high credit quality issuer of bonds. Maybe, in old days, we would look to utilities, because they're not going to default on their bonds. They can actually charge more for their water, so they're going to be able to pay back that bond. They're very secure, safe bond investments, traditionally.